Thinking about your 401(k) lately? This is what I’m doing...

Given the tremendous volatility in the markets over the past month, it is very tempting to cash out of your 401(k) or, at a minimum, stop/slow your future contributions.  This is a bad idea because when the market turns (eventually, one day…), you want to be in a position to participate in the recovery. Therefore, rather than mess with my current balance, I am focused on maximizing my future contributions.

Given there are so many unknowns related to the pandemic / potential bailout, my opinion is that we have not hit the bottom yet (if you disagree, this strategy may or may not make sense for you). Therefore, while I want to continue to contribute to my retirement, I don’t want these new contributions to lose 5%, 10%, or 20% on the way down to the bottom.

To avoid this, I’ve revised my elections so that 100% of new contributions go into the money market fund option my plan offers. A money market fund has a risk/return profile very similar to a low return savings account and most 401(k) plans offer them as an investment option.

When the time is right (later in the year when market volatility is less and it seems like we are past the bottom), I will reallocate these dollars to other funds. Admittedly, this strategy has a market timing component to it (which is generally not recommended), but for me, the risk of timing the bottom wrong, is less daunting than the risk of continuing to dump new dollars into the market at a time when it is likely to continue to fall.

This is meant to be a temporary fix for a season when the market is consistently ticking down. I won’t be parking my money here long term. If I did, I’d miss out on investing in more risky options with the potential for much higher returns. Higher returns are needed to meet my long term retirement goals.